The FINANCIAL — Fitch Ratings has on August 31 affirmed the ratings of Bank of Shanghai (BoS) and China Everbright Bank (CEB), as follows: BoS: Long-term Issuer Default Rating (IDR) affirmed at 'BB-' with a Stable Outlook, Short-term IDR at 'B', Support rating at '3', Support Rating Floor at 'BB-' and Individual rating at 'D'.
CEB: Individual rating affirmed at 'D/E' and Support rating at '2'.
"BoS's ratings reflect its strong local franchise and comparatively good management, albeit constrained by ongoing issues relating to asset quality, as well as high geographic, customer, and sectoral concentration. Loan growth was robust in 2007 and 2008 amid a benign economic backdrop, but accelerated to 31% un-annualised in H109 driven by lending for local government-backed infrastructure projects and real estate/construction. Around 50% of new credit comprised discounted bills, in which counterparty banks hold the credit risk of the corporate borrower rather than BoS. Due largely to the denominator effect of strong loan growth, BoS's ratios of NPLs and special mention (SM) loans improved to 1.8% and 2.9% at end-H109, respectively. However, the NPL balance adjusted for charge-offs increased by 22% in 2008, which is at the higher end among Chinese banks. Loan loss reserve coverage improved to 141% in H109, but drops notably when SM loans are included. After declining slightly in 2008, BoS's profitability has come under escalating pressure in 2009, with ROAA falling to 0.81% in H109 (2008: 0.91%) as surging loan growth and heightened competition weigh on loan yields across the sector. Profitability will likely remain under pressure as long as loose liquidity conditions and narrow margins persist in the banking system. BoS's ratio of equity/assets steadily improved from 2005-08 owing to healthy internal capital generation and fair-value gains on investments, but capital erosion is increasingly a concern given rapid growth and declining earnings. Issuance of subordinated bonds and an IPO are under consideration, but no timing has been set," Fitch report says.
CEB's credit profile continues to improve post-restructuring, but asset quality remains a major concern given the recent acceleration in credit and ongoing thin core capital. Outstanding loans rose 32% un-annualised in H109 while off balance sheet acceptances rose 226%. About half of the increase in loans comprised discounted bills, in which counterparty banks hold the credit risk of the corporate borrower rather than CEB. The bank expects its lending to slow significantly in H209 owing to capital constraints. CEB's NPL ratio fell to 2% at end-2008 while loan loss reserve coverage rose to 150%. Of the 16 largest commercial banks in China, CEB is the only entity that continues to not report data on special mention loans. However, figures on overdue loans showed a noticeable 32% rise in loans overdue 1 day to 1 year in 2008, which could indicate future asset quality pressure. Core profitability strengthened in the immediate aftermath of restructuring, but held steady in 2008. Earnings have been under pressure in 2009 due to falling loan yields across the industry, as well as the removal of one-off restructuring tax breaks. Capitalisation has been a long-standing issue at CEB. To ease strains from the recent surge in growth, the bank just completed a CNY11.5bn equity private placement, and is preparing for a possible IPO in 2010.
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